Both in Europe and the UK, concerns have been raised over increasing evidence of poor conduct and risks to investor protection from retail contracts for differences (CfDs) and binary options. In addition, there has been an increase in the number of firms operating in the CfD market, often selling through online platforms, prompting concerns that retail customers trading CfD products do not have an adequate understanding of these products.

Regulatory Response

Following a consultation in January 2018, ESMA has decided to use its product intervention powers under MiFIR to address these investor protection risks.  It has agreed the following measures:

  1. To prohibit the marketing, distribution and sale of binary options to retail clients (effective 2 July 2018 for three months).
  2. To restrict the marketing, distribution or sale of CfDs to retail clients, including rolling spot forex and financial spread bets (effective 1 August 2018 for three months).

The restrictions applied to CfDs are:

  • leverage limits on the opening of a position between 30:1 and 2:1, depending on the price volatility of the underlying asset;
  • a 50% margin close out rule applied on a per account basis;
  • negative balance protection, limiting retail clients’ liability to the funds in their CFD trading account;
  • a prohibition on firms offering monetary and non-monetary benefits (excluding research and information tools) to retail investors; and
  • a standardised risk warning, including firm-specific figures on the percentage of client accounts that have lost money trading CFDs.

The measures have now been published in the Official Journal in the form of ESMA Decisions.  ESMA will review the measures and consider whether they should be extended before the end of the 3 month period.

Retails CfDs updates from February:

FCA statement on onshoring ESMA temporary intervention measures Statement 22.02.19

Retails CfDs updates from December:

FCA Consultation Paper CP18/38 CfDs CP18/38 07.12.18
FCA Consultation Paper CP18/37 Product Intervention Binary Options CP18/37 07.12.18

Retails CfDs updates from September:

ESMA renews restrictions on CFDs for another three months Press release 28.09.18
Q&As on temporary product intervention measures updated Q&A 28.09.18


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